Information technology (IT) has been recognized for its potential to contribute to sustained competitive advantage for firms, however, research on the relationship between information technology spending and firm performance has produced inconsistent results, leading many to note an apparent “productivity paradox.” This potential hazard is particularly acute for small businesses that do not have sufficient slack resources to absorb unproductive spending. To address this issue, we suggest that a small firm's ability to develop aligned information technology capabilities will affect its ability to use strategic flexibility to proactively anticipate and react to needed changes, thereby improving firm performance. Results of the study, based on a sample of 160 small firms, largely support the proposed model. The work holds important implications for future research and management related to the dynamics of how firm IT capabilities are translated into firm performance.
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